I'm the Founder and Managing Partner of Ironfire Capital LLC, which runs a tech-focused hedge fund and angel fund. I did a Ph.D. in Management at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management. You can follow me on Twitter @ericjackson, subscribe to me on Facebook, follow me on Sina Weibo, or Circle me on Google+. My email is: dr.eric.jackson@me.com

The Owner of Yahoo!'s Patents Could Cripple Facebook's IPO Aspirations

Former Yahoo! head of IP, Joseph Siino, said in a 2006 interview with Law & Business: “Yahoo happens to be one of a handful of companies at the incredible convergence between media companies and technology companies, between Hollywood and Silicon Valley.”

Of all the companies that Yahoo! (or its owner) could go after for violating intellectual property rights, perhaps the most intriguing is Facebook. Here is a company that is new to the Internet world in the way that Google was new to the mobile Internet world. Just as Google lacked a large IP library, so does Facebook. And Facebook’s future revenue stream that its investors are counting on to help the company overtake Google in market capitalization is virtually all derived from ads. It appears that a significant amount of that ad revenue will infringe on Yahoo!’s paid search, display ad, and social networking patents according to the contacts I’ve spoken to.

If so, Facebook could be held over a barrel before any IPO in the way that Overture did with Google. And what will they have to pay to settle the matter? You can bet that it will be a heck of a lot more than what Google paid to Yahoo! back in 2004. More than the $1.5 billion that Yahoo! paid for Overture back in 2003? Probably a lot more.

So why hasn’t Yahoo! chosen to go after Facebook already? Two things. One, Yahoo! is still part of the old Silicon Valley that uses patents defensively rather than offensively. Going thermonuclear war on Facebook would certainly make a lot of enemies for Yahoo! in the Valley — especially with Facebook’s investors. However, it certainly doesn’t appear that Daniel Loeb would mind bruising a few egos in the Valley. The second reason why Yahoo! has likely not gone after Facebook yet is that Yahoo! has outsourced its search to Microsoft and Microsoft is an investor in Facebook.

But, take the Yahoo! IP portfolio out of Yahoo! and someone could have a field day going after Facebook, Microsoft and many others.

So, who would like to hurt Facebook? Probably tops on the list would be Google. This might explain the real reason why Google has shown interest in participating in buying Yahoo! And, interestingly, the former associate General Counsel of Yahoo! IP is now senior patent counsel at Google: Duane Valz – so Google knows well the value of Yahoo!’s portfolio.

Any enemy of Google’s might want to keep this IP out of the hands of Google. That would definitely include Microsoft, but it could also include Apple (AAPL). There have been absolutely no rumors about Apple’s potential interest in Yahoo! as yet, but Apple certainly likes to play from strength in terms of its patents. They would have an interest in hurting Google’s attempts to build up its patent portfolio. Apple might also be interested in having some leverage over Facebook in future discussions. Apple of course has plenty of cash to fund a standalone buyout of Yahoo!’s IP separate from the rest of the company. If the price was high enough, Yahoo! shareholders might be very interested.

Facebook itself – as a private company – is in a very vulnerable position here. It doesn’t have the cash to fund a buyout of the Yahoo! IP itself. However, it could try and team up with friendly investors in it like Microsoft and DST (who is a small investor in Alibaba Group) and possibly someone friendly in the Valley like Silver Lake.

And what about the Yahoo! board? It actually appears that they realize the value of their patent portfolio as well. Earlier last month, the New York Times said in an article “Yahoo has also talked up some of its other assets, including more than 1,000 patents, including those for search and display advertising, that the company believes would fetch high prices.” I spoke with Michael De La Merced and Evelyn Rusli afterwards and they confirmed that the Yahoo! board was definitely aware of and discussing the value of their patent portfolio with potential bidders.

That’s good for Yahoo! shareholders. That’s bad for Facebook investors.

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